IFRS Implications Affect More Than Corporate Accounting

Nov 22, 2011

No matter what side of the debate they are on, most companies have been up in arms when it comes to the discussion on whether the United States should move from the Generally Accepted Accounting Principals, overseen by the

No matter what side of the debate they are on, most companies have been up in arms when it comes to the discussion on whether the United States should move from the Generally Accepted Accounting Principals, overseen by the Financial Accounting Standards Board, to the International Accounting Standards Board's International Financial Reporting Standard.

Those in favor of convergence are typically multinational corporations who, until now, have had to maintain and submit separate records to FASB and IASB that complied with their individual sets of standards. U.S.-only companies have argued that transitioning to IFRS would be a costly and complicated undertaking, requiring them to retrain employees and transform internal policies and procedures. However, it is not just the companies that will be affected by a change in the domestic reporting system.

As the head of KPMG's Global IFRS initiative, Gary Reader, said, "the most affected companies could be those with bundled products and services, or those engaged in construction activities - for example, the telecoms, software and engineering industries." He continued, noting that the new proposals would change how and when the companies in those sectors recognize revenue.

PricewaterhouseCoopers released a report detailing all the implications that IFRS conversion would carry, most noticeably for accountants and the way they compute book-tax differences. Companies' cash taxes could also be negatively impacted, since IFRS does not allow for the last-in-first-out (LIFO) inventory method and changes the practices of leasing and recognizing advance payments on the books, PwC said.

In addition to accountants being affected by convergence, financial advisors and their clients will also feel the sting of change, Pierre Ghorbanian writes for Advisor magazine. With the transition, insurance companies in Canada would have to reserve more money and "mark their asset value to market value on long-term assets held to balance," he explains. "These long-term liabilities could cause them to stop writing new long-term permanent insurance policies."

U.S. insurers and their customers can anticipate the same effect soon, as it is expected American lawmakers will decide to adopt IFRS.

So what can corporations do to protect their insurance coverage? Ghorbanian suggests a yearly renewal term (YRT) universal life policy for anyone who requires "normal life expectancy coverage."

The idea behind the transition was to offer "more relevant, current market information about the value of reported asset and liabilities," Dr. Julia Sawicki, associate professor at Dalhousie University’s School of Business Administration, told the source.

"In practice, the real economic effects on financial markets and products are controversial and possibly detrimental," she said. "The effects on financial planners and their clients are a case in point." As a result of that, there's a chance that insurance companies will cease to offer long-term permanent policies, which will complicate things for advisors' clients who are hoping to plan their estates.

As a footnote, financial and business journalists will also have to relearn what they knew about U.S. accounting practices. According to the Vanguard, a Nigerian newspaper, the National Insurance Commission (NAICOM) is planning to run training sessions on IFRS for reporters who cover the insurance industry in that country. Nigeria is set to start reporting under IFRS beginning on January 1, 2012.

"This would ensure that when they report on the finances of companies, they would be in a better position to inform the general public on the true state of things," NAICOM's commissioner for insurance, Fola Daniel, said in a statement quoted by the news source.

Comments

Transaction structure, operating limits, and financing options all depend, in part, on the application of accounting conventions and principles...in IFRS as in GAAP. A change in conventions and principles will, accordingly, have impacts beyond "just accounting".